The word “financial freedom” is one that we hear a lot these days. Everyone has a different understanding of the same. Some argue that it’s about getting what you want and when you want it; having no debt; being self-sufficient, or simply being wealthy.
These are honestly some vague responses. Though we spend a lot of time talking about it but the truth is we barely have an idea about what it means.
In this blog, we’ll talk about financial freedom and a step-by-step plan for achieving it quickly.
The first question is, what exactly is financial freedom?
Having enough residual income to cover your living expenses is the definition of financial freedom. It’s not about being wealthy or having a lot of money; it’s about having enough to meet your expenditures so you can spend your time doing things you enjoy rather than doing anything solely to get money. It is only possible if you are prepared for it. All you need is a little money management.
Here are the 5 steps you need to follow to achieve financial freedom:
Keep your spending to a reasonable level:
You must plan your finances, keep track of your income and expenses, make a budget, develop a savings habit, invest with consistency, and avoid debt. Debt is a significant barrier to financial freedom. The worst type is credit card debt, which has interest rates ranging from 30 to 40 percent. Avoid using credit cards and develop a debt repayment strategy to pay off your current bills. It should be done even before you begin investing.
Follow 50:30:20 Rule for income allocation:
According to the thumb rule, a person should devote 50% of his or her income to “needs,” or compulsory expenses, 30% to “wants,” or domestic spending, and 20% to investment goals or savings. When it comes to saving money, you must build a habit of saving. “Pay yourself first” is one of the most successful saving strategies. Paying yourself first involves setting aside a specific amount of money for savings each time you are paid before spending any of it. For example, if you invest Rs. 10,000 per month for 20 years, with an average interest rate of 13%.
Increase your investment:
To reach your objectives, you must invest. It’ll help you fulfill your ambitions. You are also saving and building a corpus for the bad days by making investments. Besides, making regular investments, and increasing them annually pushes you to set aside money regularly, which helps you develop financial discipline over time. For example, you can build a massive corpus of 2 crores if you increase your investment by only 10% annually.
Plan your Taxes and Insurance:
To pay the least amount of taxes on your income, you must save taxes and take advantage of any available discounts. As far as your insurances are concerned, you only need two insurances, one, a life insurance for your life cover between 10x – 20x of your income; two, a health insurance for your health depending on your life stage.
Review your financials periodically:
You must evaluate your financials on a regular basis; you can update it annually, quarterly, or at any other time according to your convenience. You only have to be consistent about it; the more consistent you are, the more financially secure you will be. This will help you in identifying unnecessary expenses, investment performance, portfolio rebalancing, and many other things which will help you achieve financial success.
Last but not least, “it’s never too early”, you’ve heard before, and you’ll hear it again. Begin investing as soon as possible, even if it’s in small amounts or installments, and let compounding work its wonders. When planning your monthly budget, using a goal-based approach will help in determining how much money should go towards each investment. It can save you a lot of money while also relieving you of unnecessary financial stress.
There is nothing more important than investing in yourself; the more you put in yourself, the better you will become. Reading good books, meeting new people, and developing skills will certainly help you come up with fresh ideas that will assist you in accomplishing your life goals or pushing you towards a more successful life.
Also, never compare yourself to your peers. They are living their lives, and you are living yours. Don’t get tempted to do what they are doing and, try to avoid the impulse to do the same.
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